What Lessons does the Olympus Saga hold for Singapore and our SWFs?

Olympus has been much in the news recently. Originally a camera company, these days much of its business comes from medical technology such as endoscopes and microscopes. It also gained the distinction of being one of the few Japanese companies, including Sony and Nissan to appoint a foreign CEO. Namely, Michael Woodford, a Briton.

On October 14th Olympus sacked Mr. Woodford after he raised questions about what he saw as unjustifiably large payments totaling US$1.3 billion in relation to certain corporate transactions. Olympus blamed the sacking on major differences between Michael C. Woodford and the rest of the management team.

As soon as I read the news I couldn’t help thinking of Charles ‘Chip’ Goodyear. The sentiments expressed in the official statements sounded so similar. Then again I am always wary of monoliths, whether non-democratic governments or multi-national companies, which wheel out Culture as an excuse for carrying on doing what they do without accountability.

Indeed Olympus issued a statement which in addition to the major differences cited goes on to say that the company will establish a Japanese style management in which “all our employees will head for the same direction” (sic). Here in Singapore they like the phrase ‘Asian values’ and in fact Temasek Holdings and PAP government statements can sound very similar to the Olympus board when they call for “cohesion” and “constructive” politics. Simply asking awkward questions and refusing to keep quiet is out of step with Japanese style management values/Asian values.

What were the details of the transactions about which Woodford sought answers? In 2008 Olympus acquired Gyrus Group, a British company, for over US$2 billion. In connection with this transaction it ended up paying US$687 million to a pair of obscure corporate advisory firms headed by two Japanese bankers. This payment represented nearly one-third of the value of the acquisition. Usually the fees in this type of transaction are around 1% of the value of an acquisition. Once they had got the money, the two bankers behind the advisory firms wound them up. They have since refused to comment. After the news broke, the FBI have also announced that they are conducting an investigation to see if any US laws were broken.

Olympus also paid US$773 million in 2008 to acquire three small loss-making firms in businesses unrelated to its own. In making the acquisitions it was advised by a company called Global Company which owned stakes in the three companies. The relationship with Global Company was overseen by Mr. Kikukawa, the company chairman. This is the same Kikukawa who dismissed Woodford. After buying the companies, Olympus within a year wrote off two-thirds of the acquisition cost.

After Mr. Woodford’s sacking and the subsequent revelations about questionable payments, Olympus’s share price collapsed, falling by 50%. In typical Japanese fashion Mr. Kikukawa was forced to commit the metaphorical seppuku and resign. In Japan this falling on the sword is usually seen as the end of the matter and business goes on as usual with a new name at the helm. In fact the company has promised a third-party inquiry but this clashes with statements by the new Chairman who is still insisting that there were no improprieties.

Today there were more revelations. Robert Mundell, a Nobel Prize-winning economist and the only foreign director on Olympus’s board when these transactions took place, made three trips to Japan prior to joining the board which were paid for by Axes Japan, a company owned by the same people who owned the advisory firm, Axes America, that was paid the outsize fee. However it is not known whether Mundell attended any of the meetings which approved the transactions or whether he recused himself.

In Olympus’s case the company has been punished by the markets for what appear to have been shareholder-value destroying transactions. Previously bullish analysts have swiftly revised their ratings and the company will be forced to pay lip service to the values of transparency and accountability by commissioning a third party inquiry. However much management might wish to escape scrutiny of their activities by appealing to strictly Japanese values this is impossible when their company is listed on the first section of the Tokyo Stock Exchange and has or had a significant international shareholding. The scandal has prompted even the Japanese PM to weigh in. This is highly unusual for a Japanese leader but he feels the controversy will harm his country’s image.

To quote his words, “it will be a problem if people take the events at this one Japanese company and generalize from that to say that Japan is a country that does not follow the rules of capitalism.” He is worried about the damage this could do to Japan’s reputation as a place to invest.

As I said above, the Olympus affair would appear to have uncanny parallels with the resignation of Chip Goodyear as CEO-designate of Temasek, a few months after being appointed. In this case there was no public sacking. Instead the resignation was supposedly by mutual agreement citing “unresolved strategic differences”. The lack of explanation failed to satisfy Singaporeans. It is notable that when pressed in Parliament to elaborate on the reasons for the resignation Finance Minister Tharman said that it would not be in the public interest to do so.

If Temasek had been a publicly listed company, then the lack of disclosure might have been a strong signal to investors that perhaps corporate governance was not all it should be and that they should head for the exit. After all asymmetric information between corporate “insiders” and “outsiders” is a key reason why there is a share price discount for poor corporate governance.

However Temasek (and GIC) are not publicly listed. Thus Singaporeans are locked in to their “investment”, with no ability to sell and get their money out. They cannot sack the management if it is deemed to have performed poorly. And they can’t even ask for a third Party enquiry. That is why I have consistently advocated the privatization and listing of Temasek and GIC and the distribution of shares to Singaporeans so that we become actual stake-holders rather than fantasy ones.

Too often the words “Asian values” are used in a self-serving manner designed to prevent questioning and accountability. The British president of Olympus was sacked for being” un-Japanese”. But they knew he was not Japanese when they appointed him. They seemed taken aback that he was demanding answers to questions that the company’s board did not want asked. In truth his sacking had little to do with being Japanese or not. They just did not want the extent of their destruction of shareholder value exposed.

In Singapore unfortunately our government and most of our Parliamentary Opposition seem to have the same mindset. Sadly our Opposition, with one or two exceptions, has so far been prepared to play the same role as the tame external directors on Olympus’s board and not hold the government to account. What we need in Parliament is more Mr. Woodfords and less Mr. Kikukawas.

Our government is always keen to slavishly import ideas and so-called expertise from Britain and other democratic countries when it suits them. The state controlled media are quick to report slavish adulation of our government by foreigners that were it critical would be swiftly condemned as interfering in domestic politics. We should not be gulled into thinking that the right to ask questions and demand accountability and transparency are a Western import we should do without. Just as shareholders have the right to demand accountability from the managers of the companies they own, so we as citizens have the right and indeed the duty to subject government policies to scrutiny and hold ministers accountable. Indeed it is key to our ability to be taken seriously as a First World nation.

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Published by kjeyaretnam

I'm a Singaporean economist who became an opposition activist. I blog to provide an alternative to the porkies that the Pinkies tell. It just so happens that my alternative is the truth. That's why I've never been sued in any civil or criminal court no matter how hard hitting my criticism.
I'm quoted and interviewed and asked to speak across the world but largely censored in Singapore in an effort to silence my political opinions.
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I read economics at Cambridge and could be broadly described as from the Keynesian school but I believe in interventions. I was formerly a successful hedge fund manager. After economics and politics my greatest interests are history, film and Makan. I run but I run so I can eat like a Singaporean.
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This is nothing new. Many wicked organisation will not want their dirty linen washed in public space. But being a public entity, it has moral obligation to reveal what’s good or bad in it for the public discretion. Hitler would not want his plan to be frustrated and he would kill those who stand in his way. We need some kind of superheroes to stop evil people from doing further damage to the marketplace or country.

Hi Kenneth,
The parallel you drew is timely. There are many symptoms of groupthink that can be seen from your examples, such as a stereotyped view of the enemy, (whether Woodford or Goodyear), which is one advantage for the group in getting foreigners. There also appears an unquestioned belief in the group’s morality. However, change in the Singapore situation is more difficult and need to come from the masses, which is why I am somewhat less optimistic, for several reasons. First, the masses here do not understand or do not want to understand. Second, it is always someone else’s job to do it. I am still a little optimistic because if the second is solved, the first solves itself. I am somewhat bearish in that after the tipping point is reached (which it will), instead of change, there is gridlock, and the masses get punished in a different way.

“In Singapore unfortunately our government and most of our Parliamentary Opposition seem to have the same mindset. Sadly our Opposition, with one or two exceptions, has so far been prepared to play the same role as the tame external directors on Olympus’s board and not hold the government to account.” – Kenneth Jeyaretnam

… makes me wonder: who are that one or two exceptions from the ‘Parliamentary Opposition’ who do not have the same mindset as the PAP?

Hi Bryan Ti. I think the clue is in the words ‘so far.’ I am referring to Opposition in the past as being prepared to play the same role as the tame external directors on Olympus’s board.Therefore the exceptions are in the past also. I’m in ‘wait and see’ mode for this current crop.

HI Jonas, You are right. It is true that certain exchanges have stricter rules but this all goes back to asymmetric information and The Market for Lemons.theory. Companies will always benefit from the brand value of being listed on the exchanges which have the strictest rules and provide superior disclosure. Back in 2006 there was quite a controversy over Chinese companies that tried to circumvent US disclosure requirements by taking over shell companies and listing through the back door, as it were. The US exchanges had originally been criticised for being too strict but in fact investors simply got suspicious and then wise. The Chinese companies were punished and valuations destroyed as investors went elsewhere. You may remember Sino Forest at the centre of that controversy. I disagree that more comprehensive disclosure can be obtained without listing.
In any case I am not so much concerned about Olympus. They have in fact already provided a breakdown of advisory fees. Mendell is being looked at. The FBI will probably instigate an investigation. Even their own Prime Minister has weighed in to say that, No! This so called ‘Japanese style’ is not compatible with modern Japanese standards of corporate governance.

What concerns me and should concern all Singaporeans with a shareholder stake, is our own culture of non disclosure. I don’t agree that voluntary disclosure would or could ever be more comprehensive than listing on any stock exchange no matter how lax that exchange, as far as Temasek and GIC are concerned. The point of this article was just that. That we have received no disclosure on the goings on at Temasek and as it is not publicly listed we never will.

In previous articles I have pointed out that our President’s powers are extremely limited and that the public are confused as to his powers and what information he can actually obtain were he willing to seek it. As for our finance minister , he has proven that he is able to stonewall any questions by referring to National Interest. And finally our Opposition does not have the expertise to ask the right questions even if it had the inclination to ask those difficult questions of the government. We need a Singaporean ‘Woodford’ in Parliament not a bunch of ‘Mendells’ and ‘Kikukawas’.

Great insights, Kenneth. I understand disclosure rules of corporate transactions for public-listed firms are only as good as the exchange in which it is listed on. Therefore while I agree more detailed disclosure helps to prevent misdemeanors, public listing is simply not as good a solution as more comprehensive disclosure. In response to the Olympus case, perhaps a breakdown of advisory fees and other transaction costs might be more useful.